Tension between the US White House and Iraq is running high, and the Cabinet recently convened a meeting of its ad hoc economic response task force to discuss responses in the event of a war. They came up with seven measures, which focus on guaranteeing the supply of petroleum products and reassuring the public.
Since approximately 40 percent of the country's imported crude oil is derived from the Middle East, oil prices and the supply of crude oil have great influence on the local economy. Quoting data from Washington's Center for Strategic and International Studies, the Council for Economic Planning and Development believes that in the short term, war between the US and Iraq will benefit economic recovery in the US and around the world. Thus it should generally help exports and other types of economic activity.
However, if war drags on for more than six weeks, then the longer it lasts, the more it will be detrimental not only to Taiwan's economy but those of many other countries. Growth could slow to anywhere from 0.3 percent to 2 percent
Thus the uncertainties stemming from the threat of war will certainly have an impact on investor confidence, and this will be reflected in stock market volatility. The gradual trends over the past nine months toward economic recovery and stronger consumption and investment will be negatively impacted.
It is important to note that the force behind this economic recovery is growth in exports to China and Southeast Asia. Last year's economic growth still showed signs of being "outwardly oriented."
In other words, domestic investment and consumption were still insufficient. Thus, in addition to designing responses to war between the US and Iraq, the government should pay attention to domestic deflationary pressure and the problem of developing cross-strait economic relations.
Although the Cabinet has already proposed seven response measures -- including stabilizing the stock and currency markets, providing manufacturers with financing, stronger promotion of public works projects and expansionary fiscal policy -- whether or not these will be able to solve the problem of sluggish economic growth is a question that awaits further examination by the government.
Hsu Chen-ming is a professor in the department of economics at National Taiwan University.
Translated by Ethan Harkness
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